Risk and Opportunity of Greenhouse Gas Emissions (GHG) Reductions
Senior ESG Analyst, Walden Asset Management
In September 2013, the Intergovernmental Panel on Climate Change (IPCC), the world’s leading scientific authority on climate change, released an updated report on the scientific basis for understanding climate change. The report concluded that warming is unequivocal, changes are unprecedented, and that human influence is extremely likely to be the main cause of climate change. The IPCC went on to emphasize the imperative to reduce emissions sooner rather than later, noting the likely exponential increase in costs due to inaction. In response, investors and climate activists are redoubling their efforts to address climate change.
Shareowners are looking for companies to articulate policies and positions on climate change that eschew ideology and partisan politics, are grounded in scientific understanding, and enable effective risk management. Specifically, investors are seeking (as they have in the past) specific public commitments to reduce GHG emissions and energy use. Going further this year, shareowners are pressing companies to develop these commitments in the context of the commitment of the global community to limit warming to 2 degrees centigrade as noted in the Copenhagen Accord, which translates to a global reduction of GHG emissions of 50 percent by 2050.
While GHG reduction is often framed in terms of risk and costs, the opportunities are becoming better understood.
- Analysis by McKinsey & Co., Deloitte Consulting and Point380 found that U.S. companies could reduce emissions 3 percent annually between now and 2020 and realize savings up to $780 billion.
- A study of 386 U.S. companies in the S&P 500 by CDP found that:
- 79 percent of companies “earn a higher return on their carbon reduction investments than on their overall corporate capital investments.”
- Energy efficiency improvements earned an average return on investment of 196 percent, with an average payback period between two and three years.
Understanding the risks and opportunities associated with climate change, over half of S&P 500 companies have set GHG emission reduction targets which can drive innovation and enhance shareholder value. And businesses, including General Motors, Microsoft, and Nike, signed the Climate Declaration that states, “Tackling climate change is one of America’s greatest economic opportunities of the 21st century.”
Early results from engagement this year have been promising. A number of companies have agreed to strengthen policy statements, develop and strengthen public goals and targets, and provide investors and other stakeholders more detailed disclosure. Yet there is still much work to be done. Many companies have yet to develop a strategy to address climate change, and we are looking for new ways to expand and deepen this absolutely necessary effort.
Download Proxy Preview 2014 to find more greenhouse gas emissions shareholder resolutions.